Australian Wine Exports to the Market of the USA Assignment

Australian Wine Exports to the Market of the USA - Assignment Example In this market, when the supply of one currency decreases, the demand for the other currency simultaneously falls. When the Australian exports of wine to the US market decrease, this indicates that US citizens are supplying less US dollars to buy less of Australian dollars in exchange which are required to buy a smaller quantity of exports. This, in turn, will lead to a depreciation in the foreign exchange value of the Australian dollar. (Jackson, McIver, Wilson 2011) (2) A strong Australian dollar indicates a high value of the currency with respect to the other currencies of its partner trading nations. When the Government maintains a strong currency, it prevents the currency from evaluating. Under the Aggregate Expenditure Model: If Australia maintains a strong currency, its trading partners will be discouraged to buy Australian exports. Therefore, the value of the country’s exports will fall. Thus in equation (1), X falls. Since X is an important determinant in the Aggregate Expenditure of an economy, a decrease in X causes the AE of Australia to fall. The AE, in turn, determines the GDP of the country. With a decrease in AE, the GDP of the nation will decrease. A decrease in the GDP cannot be a healthy sign for an economy. Thus, if Australia maintains a strong currency this might prove to be a threat to the overall economy of the nation. In the short run, this will have a positive effect on the Balance of Payments (BOP). The advertisement campaign will make Australia’s regional wines more attractive to the US customers and they will buy more of this wine. Thus Australia’s export of wine rises, i.e X rises. In the short run, exports will increase in Australia’s Balance of Payments and the exchange value of the Australian dollar will appreciate. In the long run, the effect of an increase in investment will be ambiguous.